Price mechanism book 2 Flashcards
Factors affecting shift in demand
- Changes in level of income
- Change in price or availability of related goods
- Expectations of future price changes
- Change in tastes and preferences
- Change in govt policy
- Change in interest rates/availability of credit
- Change in population structure
EGYPT-A
how does level of income affect demand?
When peoples level of income rises, their ability to buy goods and purchasing power increases causing their demand for most goods to rise.
how does change in price or availability of related goods affect demand
Substitute goods are goods in competitive demand (satisfy the same needs and may replace each other in use). Fall in price of one good will cause consumers to switch away from another to purchase the relatively cheaper good, leading to a fall in the good they switched away from.
change in demand for related goods - derived demand vs joint demand
how do expectations in future price changes affect demand?
if people expect P to rise then they are likely to buy it now before P increase sets in
how does change in taste/preferences affect
The more desirable people find a good, the more willing they are to pay for it ,ceteris paribus, the more of it they will demand at any given price
What are the factors shifting the supply curve?
- Change in MCOP
2.Change in production of related goods
3.Expectation of future price levels
4.Nature random shocks and unpredictable events - Change in number of sellers/firms
PERMS
How does a change in MCOP affect supply
Every extra unit of output will cause more than before which lowers the total profits for firm thus they are less willing to supply the good at every price level
How do changes in production of price of related goods affect supply?
For goods in competitive supply, since they require similar FOP. If there is an increase in price or demand for a good, firms will devote more FOPS to the good causing a fall in supply for the other good
How does expectation of future price changes affect S
If it is expected to rise, firms may hold back the amt they sell currently to build up their stock in order to sell them at a higher price in the future to enjoy larger profit margins thus, the supply of goods now will fall.
What happens when there is a shortage?
When there is a shortage of goods, there is an upward pressure on price since quantity demanded is now more than the quantity supplied. Frustrated consumers are willing to pay higher prices in order to obtain the good causing prices to rise. This rise in P means that firms are able to earn more revenue to cover their MCOP. This rise in profitability incentivises profit-motivated firms to allocate more resources to increase the Qs. At the same time Qd falls as less consumers willing and able to purchase the good at the new price level. This leads to a new equilibrium where Qs=Qd at a higher price.
Definition of income elasticity of demand(YED) and formula
YED measures the responsiveness of demand to a change in income, ceteris paribus
percentage change in demand/ percentage change in income
what do diff YED values stand for?
below 0 is inferior where increase in income leads to fall in demand
between 0 and 1 is increase in income leads to less than proportionate increase in demand while more than 1 is more than proportionate increase1
What affects YED
Degree of necessity for good and perception due to income level of consumers
What is cross-price elasticity of demand and its formula
The cross price elasticity of demand (XED) is the responsiveness of demand for a good to a change in the price of another good, ceteris paribus.
percentage change in demand for good A/ percentage change in price of good B
what do diff XED values stand for?
less than 0 is complimentary more than 0 is sub
